Unit 10 Income-tax and Corporate Tax Planning PYQ’s 7th Jan 2025

 The correct answer is 1) A, B, and E Only.

Key Points

Let’s analyze each statement:

• A. Commuted pension received by a government employee is fully exempted from Income Tax
  • Commuted pension received by a government employee is indeed fully exempt from income tax under the Income Tax Act, 1961.
  • Reason for inclusion: This statement is true as per the tax provisions.
• B. Section 30 of the Income Tax Act 1961 discusses deduction in respect of rent, rates, taxes, repairs and insurance of building used by the assessee for the purpose of business
  • Section 30 of the Income Tax Act, 1961, indeed provides for the deduction of expenses related to rent, rates, taxes, repairs, and insurance for buildings used for business purposes.
  • Reason for inclusion: This statement is accurate according to the Income Tax Act.
• C. Section 33 of the Income Tax Act 1961, defines provision regarding depreciation of tangible assets
  • Section 32 (not Section 33) of the Income Tax Act, 1961, deals with the provisions regarding depreciation on tangible and intangible assets.
  • Reason for exclusion: The statement is incorrect because it misidentifies the section number.
• D. Capital gain arises from transfer of any assets
  • Capital gain typically arises from the transfer of capital assets, not just any assets. The term “capital assets” has a specific definition under the Income Tax Act.
  • Reason for exclusion: The statement is too broad as it should specify “capital assets”.
• E. Short term Capital assets is defined under section 2(42 A) of the Income Tax Act 1961
  • Section 2(42A) of the Income Tax Act, 1961, indeed defines “short-term capital assets”.
  • Reason for inclusion: This statement is true and correctly identifies the section.

Therefore, the statements that are true are A: Commuted pension received by a government employee is fully exempted from Income Tax, B: Section 30 of the Income Tax Act 1961 discusses deduction in respect of rent, rates, taxes, repairs and insurance of building used by the assessee for the purpose of business, and E: Short term Capital assets is defined under section 2(42 A) of the Income Tax Act 1961.

This makes option 1: “A, B, and E Only” the correct choice.

The correct answer is ‘E, D, C, B, A’

Key Points

• Determination of Residential Status (E):
  • This is the initial step in computing Gross Total Income as the individual’s residential status determines their tax liability under the Income Tax Act.
  • Residential status helps in deciding the scope of income that will be taxable in India. For instance, residents are taxed on their global income, while non-residents are taxed only on income received or accrued in India.
• Computation of Income under each head of Income (D):
  • After determining the residential status, the next step is to compute income under the different heads of income, which include salaries, house property, business/profession, capital gains, and other sources.
  • This step involves calculating the income separately for each head, taking into account all eligible deductions and allowances.
• Clubbing of Income of spouse, minor child etc. (C):
  • In this step, the income of certain other persons such as the spouse or minor child is included in the taxpayer’s income, based on specific provisions under the Income Tax Act.
  • This is done to prevent tax evasion through the transfer of income to family members who are in lower tax brackets.
• Set off and carry forward of Losses (B):
  • After computing the income and clubbing provisions, losses if any, are set off against eligible income. This involves both intra-head and inter-head adjustments.
  • If losses cannot be fully set off in the current year, they are carried forward to subsequent years for set off against future income, as per the rules specified under the Income Tax Act.
• Computation of Gross Total Income (A):
  • The final step is to aggregate the income computed under all heads, after considering clubbing provisions and set-off and carry forward of losses, to arrive at the Gross Total Income.
  • This Gross Total Income is the sum total before any deductions under Chapter VI-A (like 80C, 80D, etc.) are applied to compute the taxable income.

 The correct answer is ‘A-IV, B-III, C-II, D-I’.

Key Points

• Section 194 of the Income Tax Act, 1961 (A) matches with Dividend (IV).
  • Explanation: Section 194 of the Income Tax Act pertains to the deduction of tax at source on dividend payments made to shareholders.
  • This section mandates companies to deduct TDS at the prescribed rate before distributing dividends to their shareholders.
  • Key Point: It ensures that tax is collected at the time of payment itself, thus preventing evasion and ensuring timely collection of taxes.
• Section 194C of the Income Tax Act, 1961 (B) matches with Payment to contractor and sub-contractor (III).
  • Explanation: Section 194C deals with the deduction of TDS on payments made to contractors and sub-contractors.
  • This section ensures that tax is deducted at source on payments made for carrying out any work, including supply of labor for carrying out any work.
  • Key Point: This provision helps in bringing contractors and sub-contractors into the tax net and ensures tax compliance.
• Section 194E of the Income Tax Act, 1961 (C) matches with Payment to the non-resident sportsman (II).
  • Explanation: Section 194E pertains to the deduction of TDS on payments made to non-resident sportsmen, including athletes, sports associations, and institutions.
  • This section ensures that tax is deducted at source on any income earned by non-resident sportsmen in India.
  • Key Point: It helps in collecting tax on the earnings of non-resident sportsmen, ensuring they contribute to the Indian tax system.
• Section 194F of the Income Tax Act, 1961 (D) matches with Payment on account of repurchase of units by mutual fund (I).
  • Explanation: Section 194F deals with the deduction of TDS on payments made for the repurchase of units by mutual funds.
  • This section mandates the deduction of tax at source on any amount distributed to investors upon repurchase of their units by mutual funds.
  • Key Point: It ensures that tax is collected on the income received by investors from mutual funds, thereby preventing tax evasion.

 The correct answer is – 91

Key Points

• Section 91 of the Income Tax Act 1961
  • Section 91 provides unilateral relief to taxpayers who have paid tax in a foreign country with which India does not have a double taxation avoidance agreement (DTAA).
  • Unilateral relief is intended to avoid double taxation of the same income, ensuring that the income is not taxed twice, once in the foreign country and again in India.
  • The relief is available if the taxpayer is a resident of India and has earned income from a foreign country.
  • This section ensures that taxpayers can claim relief from the income tax paid in the foreign country by providing a credit against their Indian tax liability.

Additional Information

• Section 90 of the Income Tax Act 1961
  • Section 90 deals with agreements with foreign countries or specified territories for the avoidance of double taxation of income and for the prevention of fiscal evasion.
  • This section empowers the Indian government to enter into DTAA with other countries to provide relief from double taxation.
  • The DTAA specifies the taxing rights of each country and helps in allocating the income between the countries.
• Section 89 of the Income Tax Act 1961
  • Section 89 provides relief to taxpayers who receive salary in arrears or in advance, which results in an increase in their taxable income and thereby a higher tax liability.
  • This section allows for tax relief by spreading the income over the years to which it pertains, thereby reducing the tax burden on the taxpayer.
• Section 92 of the Income Tax Act 1961
  • Section 92 pertains to transfer pricing regulations and is aimed at ensuring that international transactions between associated enterprises are conducted at arm’s length prices.
  • The section ensures that the taxable income of entities involved in international transactions is computed based on fair market value to prevent profit shifting and tax evasion.

 The correct answer is – Tax Evasion

Key Points

• Tax Evasion
  • Tax evasion refers to the illegal practice of not paying taxes by not reporting all taxable income or by taking unallowed deductions.
  • This practice involves deliberate misrepresentation or concealment of information to the tax authorities to reduce tax liability.
  • Common methods include underreporting income, inflating deductions, hiding money in offshore accounts, and not filing tax returns.
  • Tax evasion is a criminal offense and can result in substantial penalties, fines, and imprisonment.

Additional Information

• Tax Management
  • Tax management involves the efficient handling of tax matters within the legal framework.
  • This includes timely filing of returns, maintaining proper records, and compliance with tax regulations.
  • The goal is to minimize tax liability through proper planning and adherence to tax laws.
• Tax Planning
  • Tax planning refers to the process of analyzing one’s financial situation to maximize tax benefits and minimize tax liabilities within legal boundaries.
  • This involves the strategic use of tax deductions, credits, and exemptions to reduce the amount of taxes owed.
  • Effective tax planning can lead to significant savings and ensure compliance with tax laws.
• Tax Avoidance
  • Tax avoidance involves using legal methods to minimize tax liability.
  • This includes utilizing tax deductions, credits, and loopholes in the tax code to reduce the amount of taxes owed.
  • While tax avoidance is legal, it differs from tax evasion, which is illegal.

The correct answer is – Section 92C

Key Points

• Section 92C of the Income Tax Act, 1961
  • This section lays down the guidelines for determining the Arm’s Length Price (ALP) in international transactions and specified domestic transactions.
  • The ALP is crucial for ensuring that transactions between related parties are conducted as if they were between unrelated parties, thus preventing profit shifting and tax evasion.
  • Various methods for computing ALP include Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM), and Transactional Net Margin Method (TNMM).
  • The selection of the most appropriate method depends on the nature of the transaction, availability of data, and other relevant factors.

Additional Information

• Section 90
  • This section deals with agreements with foreign countries or specified territories for the relief of double taxation, exchange of information, and recovery of income tax.
  • It does not pertain to the method for computing Arm’s Length Price.
• Section 91
  • This section provides relief in respect of income-tax on income arising outside India in cases where no agreement under Section 90 exists.
  • It addresses unilateral relief from double taxation, not the computation of Arm’s Length Price.
• Section 93
  • This section deals with the avoidance of income by transfer of income to non-residents.
  • It focuses on preventing tax avoidance through income transfers, not on the computation of Arm’s Length Price.

The correct answer is 2) A, D, E Only.

Key PointsLet’s analyze each statement:

• A. Assessment Year means the period of 12 months commencing on the first day of April every year
  • This statement is true. The definition of the assessment year in the context of income tax in India is the 12-month period starting from April 1st and ending on March 31st of the following year.
• B. Rounding off of total income is defined under section 288B of the Income Tax Act, 1961
  • This statement is false. Rounding off of total income is defined under section 288A of the Income Tax Act, 1961.
• C. Rounding off of tax is defined under section 288 A of the Income Tax Act, 1961
  • This statement is false. Rounding off of tax is defined under section 288B of the Income Tax Act, 1961.
• D. Assessee is always a person but a person may or may not be an assessed
  • This statement is true. An assessee is someone who is liable to pay tax or any other amount under the Income Tax Act. However, not all persons are assessees unless they have an obligation under the Act.
• E. A person may not have assessable income but may still be an assessed
  • This statement is true. A person could be an assessee without having assessable income, for instance, if they are subject to certain provisions under the Income Tax Act that do not relate to income, such as the obligation to file a return or pay other kinds of taxes or penalties.

Therefore, the statements A, D, and E are correct. This makes option 2: “A, D, E Only” the correct choice.

The correct answer is ‘C, E, B, D, A’

Key Points

• Determination of annual value (C):
  • This step involves calculating the annual value of the property, which is essential for computing the income from house property.
  • The annual value is determined based on the fair rent, municipal valuation, and the rent received or receivable, whichever is higher.
• Deduction from (Annual Value) Income from house property (E):
  • After determining the annual value, certain deductions are allowed under Section 24 of the Income Tax Act, 1961.
  • These deductions include standard deduction, interest on borrowed capital, and others as specified.
• Provision for arrears of rent and unrealized rent received subsequently (B):
  • This point addresses the treatment of arrears of rent and unrealized rent that are received in subsequent years.
  • Such amounts are taxed in the year of receipt, subject to certain conditions and provisions.
• Treatment of income from co-owned property (D):
  • In cases where a property is co-owned, the income from such property is divided among the co-owners based on their share of ownership.
  • Each co-owner is liable to pay tax on their respective share of the income from the property.
• Deemed ownership (A):
  • Deemed ownership provisions apply to individuals who are not the legal owners but are considered owners for tax purposes.
  • This includes scenarios like property transferred to a spouse or minor child, property held by a member of a Hindu Undivided Family (HUF), and others as outlined in the Act.

The correct answer is – Resident but not ordinarily resident in India

Key Points

• Residential Status of Bret Lee
  • According to the Income Tax Act in India, an individual is considered a resident if they stay in India for 182 days or more during a financial year, or if they stay in India for at least 60 days during a financial year and for at least 365 days during the preceding four years.
  • Bret Lee visits India for 100 days each year, which means he does not meet the criteria to be classified as a resident under the first condition (182 days).
  • However, if we look at the second condition, he visits India for 100 days every year, which totals to 1000 days over the past ten years. Thus, he meets the 365 days condition in the preceding four years.
  • Even though he qualifies as a resident based on the second condition, he does not stay in India for 182 days or more in any year, which makes him a Resident but not ordinarily resident in India.

Additional Information

• Resident in India
  • An individual is classified as a resident in India if they meet either of the two conditions: staying for 182 days or more in the financial year, or staying for at least 60 days in the financial year and 365 days in the preceding four years.
  • Bret Lee does not qualify as a resident under the first condition (182 days).
• Resident and ordinarily resident in India
  • To be classified as a Resident and Ordinarily Resident (ROR), an individual must meet the resident criteria and should have been a resident in at least 2 out of the 10 preceding years and have stayed in India for 730 days or more in the preceding 7 years.
  • Bret Lee does not fulfill the criteria of being a Resident and Ordinarily Resident.
• Non-resident in India
  • An individual is considered a non-resident if they do not meet any of the conditions to be classified as a resident.
  • Bret Lee meets the 60 days and 365 days condition, so he cannot be classified as a non-resident.